tv Bloomberg Real Yield Bloomberg February 23, 2018 12:30pm-1:00pm EST
is unprecedented. with it,zero collation i think rates are going up because of the fear that inflation is going to return and central banks will adjust and it will start to exit a lot faster than you think. >> it is time to understand what is driving yields higher, it is growth with inflation attached. >> this is a trip through the year.- drip through the the aspect is international investors returning back to where they came from and the yields overseas are starting to grind higher, but hedging costs is where some of the challenges will be. hedging as a european investor coming to the u.s. market is no longer attractive, you can't get the real yield pickup going to
the tenure on a relative basis what you factor in hedging costs. jonathan: joining me for a kathy, matt,att, it went pretty well. where do we go here? we knew about the supply a year ago, and here it is. market did a nice job of handling the supply, as i expected it to. point about supply impacts on scheme,et, in the grand it is very small. industry thattage tries to minimize these impacts that are so microscopic that it takes a lot of people to pick up just a few ticks in the market. jonathan: some of these issues this week has been unprecedented in size.
but we are not talking about the font apocalypse year -- bond apocalypse. do you think it is done? >> yes and no, i think supply is going to be an issue. we are going to absorb a lot of supply, otherwise we haven't had that challenge over the last couple of years, so i think it is going to continue to push rates up. i think when treasury's head to 52 to 75, they are pricing in fed hikes expectations for inflation and growth, and the last 20 or 30 basis points has been the pricing, setting a clearing level of incremental supply, and like matt says, it feels like it is probably done because everybody knows with the supply pictures going to be for the next couple of years. i want to talk
practically, the short positions in treasury, we are looking at monster shorts right now. how much had went to positioning to high yields when we are short in the market? >> positioning has been short for some time now, people have curvet the front of the for the entirety of the fed hike cycle. have may take short positions for some time and have recently been successful. day whathe and of the will be a problem for shorts as if the data rolls over. growth data doesn't be expectations, it might be difficult to imagine but at some point it is going to happen. what he had too say about treasuries. underweightad been interest rates for some time and we are turning more neutral now, we think a lot of this move has occurred, there is no question
that the market has to digest the supply, but you're getting to a point where bonds are starting to get exciting. we haven't been able to say that in about three years. jonathan: as a look exciting? i am on board with mark, which is unusual. i am looking at yields, the 2.25.ar is at jonathan: all in the last year of the front of the treasury curve, are you sticking to that? >> there is still less than three hikes priced in this year in the very front and, so it is getting more fully priced and, so our view is they will hike three or four times so there is more value you can squeeze on the short of the front that but it is beginning to be more difficult. i think exciting is not really the word i would use,
but i would agree that two-year is starting to look attractive. they're still a little bit of yield in there and not a bad place to be. jonathan: i want to bring this up on the number terminal, the market and federal reserve hand-in-hand for 2018. with the market projects the fed projects. the opens up a whole lot more through 2020, how are those spreads? >> the fed is projected three hikes this year, two in 2019 and two 2020 until they get to 3%. we think that is the high end of is the high-end, zero is easy at three is tied, so if they get to three i think you will see economic data roll over and the curve to flatten and get inverted if they go that high. >> i absolutely agree, and if
you look at what we expect a fed to do this year, hiking three times or four times, you're talking about real policy rates that are on the verge of type territory already. at this stage you expect the inverted,e not to be but flat, but we are to philly on board with the flattening we are fully on board with the flattening trade. jonathan: what we do the economic logic, is it something we can get? >> the only way you can get that is if you get a surge in productivity growth, and we haven't seen opportunity slowing down for years. globally. a u.s.ot just phenomenon, it is global, so the fact that we get fiscal stimulus and spur inflation, investment and productivity growth -- it is visual thinking -- it is wishful
thinking, probably. the fed and visions the economy, and they lead and the demand for safe haven assets and we know one thing is for sure that demand for safe haven -- higheruld be more at elevated levels then other times. picture wherent a tax reform or tax cuts are somewhat disinflationary. companies have this newfound bottom line and margin expansion. there is a decent chance they give that back to their customers in a way of lower prices to maintain market share. there's tremendous market share in a wide range of industries where companies are fighting for market share. jonathan: coming up on the program, the auction block look
-- eight your notes commit and investors still craving african bonds, this would there were $14 billion of kenya's offering of $2 billion and securities, proving african debt still has plenty of buyers, still with me now, met for morgan stanley, sayy, and i am pleased to we welcome from london, head of credit strategy at bloomberg asset-management. is the move starting to compete with capital elsewhere into credit and investment growth in high-yield. that is the big question we are debating as credit investors, we do think that yields will move higher than the fed and it is underpriced. , bute a big move of late
we think ultimately we're going to get to 3.5 and above for the tenure and the fed is going to byanother four or five hikes the end of next year, and in the question becomes when you have at two or 2.5%, is 5.5 or 6% enough in u.s. high-yield credit? i think there is a danger that we see some are pricing of credit to clear for that. that makes it a little wary of u.s. high-yield and u.s. credit generally at this juncture. everybody talks about the yield curve as being a signal of recession but there is a behavioral impact when the fed to 2.543%, it up becomes appealing to move into the curve and move into cash, if you can buy a money market fund
at three or 2.5% today, i think a lot of people will sell their stocks and bonds and go into money markets. that is one of the things that causes recession. jonathan: if we go to money markets, i wonder -- if the fed goes to 3%, that is a high water mark, but it is probably a policy mistake and you will have libor and the threes. isathan: i do know if that your best case, but say we get to the 3.5% mark, where is it vulnerable? >> i think high-yield potentially is more vulnerable to that but because of fundamentals, but because of the strength of copper earnings and because of the growth outlook.
i think there has been quite a lot of move into investment grade -- there is a lot of duration extension risk within some segments of u.s. high-yield's, particularly within -- i think it is interesting when you look at credit held up pretty well in the face of the equity correction and the ratio we had. but the pockets we had weakness wasn't in emerging markets but in parts of u.s. high-yield. i think that is where you see some of that pressure and we see outflows coming out of that segment. jonathan: kathleen, what is the story? i don't seek signs of tension yet -- i don't see signs of tension yet. continues tot
grind down here until it doesn't do that anymore, so if you look ,t the previous cycle everything was great, fes were tied, and then at some point in the rate hike cycle, the money starts to shift out. we haven't hit it yet, but we do think it is awfully richer. you have an interesting trade, and i want you to lift the hood on it. it has to do with the tax bill, what we threw it. it is supply and demand which drives markets, it is a's red curve flattening or so the front end of the curve, spreads are going up. --is a have to do with rates they are feeling the brunt of the fed rate hikes, but a lot of money that is being repatriated, all of the big tech and pharma companies had plowed into these short duration corporate bonds to earn yields
on the money and that is being pulled back so there's selling pressure on the front end. yetwhile on the backend pension plans and companies licking their chops at the yields they can get on long-term corporate bonds. pension plan is home to them. it is a natural resting place so they are buying and getting a spread curve flattening. jonathan: tech companies are issuing to the long and as well so the demand my not be on the front end. jonathan: is that something you will be looking at in the tax plan? >> we have been looking at a --ber of traits including number of trades. there's opportunities in aluminum where we can get a kicker from some r
bonds,ies, as well as but on the tax specifically -- basically where we see the next issuance going forward, because itthat repatriation of cash, is tending to be in pharma or tech. jonathan: let's get your market check. points,p three basis down a basis on the tenure. issuance,l of this treasuries have been resilient through the week. still ahead, comments from jay powell. this is bloomberg real yield.
jonathan: i am jonathan ferro, this is bloomberg real yield. coming up, one of the highlights will be jay powell said before congress, and will get a fresh round of economic data, personal spending, and mario draghi and theresa may will be speaking. up, matt, wrap things kathy, and mike, and david rally from bloomberg asset-management. what are we looking for from chairman powell next week? >> i have read every speech he has given and every trans cript. his eyeis going to have on financial stability, more so than other chair people.
with that in mind, even though risk today, if situation eases, that will change, and that will encourage the fed to perhaps accelerate the pace of rate hikes. that is a big that in our view it will keep flattening pressure on the yield curve. jonathan: when of our clients has written in saying he is sticking and coal. the message from us is clear, we expect yields to and lower than they are today and substantially lower as the market is forward looking at credit that we get to the end of the year we think investors will not have a bike outlook as they today. people are bullish except treasuries, it will be different by the end of the year. >> we think today. rates could peak and ar around three
but 2% is much lower than anything we would on ther, i keep focusing negative as the fed withdraws the stimulus over the year, have to see the term premium move to the positive territory so that is likely to keep yields higher. jonathan: final thoughts, do you see the catalyst and what you expect from chairman powell next week? >> the catalyst is there for the tenure and i anticipate will see 3.5 on the tenure during the course of this year. i think it is underpriced and ie fed is underpriced, and accept the notion that it is going to be an excessive degree of timing that the fiscal's
stimulus and public spending, which is going to be kicking. and the fed is going to respond to that, with regards to powell is going to emphasize continuity and gradualism and it is going to be hard not to sound a little bit hawkish given the backdrop and sense of inflation and growth. jonathan: what is your view, mike? >> i think the fiscal situation is a big negative for the markets in general, all the supply and deficits and the spending and borrowing is a long-term negative. jonathan: what is chairman powell's job? >> the fiscal think creates a boom in the midterm but it is a negative in the immediate term, they have to look through that to a large extent, so yesterday careful about over hiking late in the cycle as the enthusiasm continues to go up in the
takeaway the punch bowl. upathan: i have directed with quick questions in a rapidfire round. i'm treasury specifically, by the seller or keep running? y. bu >> keep on running. jonathan: capital credit from here? >> yes. >> yes. >> credit will hang on for a couple more years. >> not yet. jonathan: i am wondering will we have a chairman powell put? >> not this time. >> yes. >> yes i think it is there. >> it is going to have a much
we are watching. bridging to the choir, as president trump addresses people at cpac, and we has to say about the second amendment antiregulation. on -- roberts mueller marches on with charges that rick gates will plead guilty hours from now. australia'snder, prime minister pays a visit to the white house and we take a look at u.s.-australian relations with a man used to have mr. turnbull's job. ♪ shery: treasuries rising in the last trading day of the week and let's get a check for the markets with abigail doolittle. abigail: we have major